The ‘Repo’ Market

8:33 pm ESTAug 12, 2014

By

Ryan Tracy

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The large and opaque “repo” market is going through a shakeout as the Federal Reserve expands its role. Here’s what’s happening.

What is a repo?

A repurchase agreement, or repo, functions as a short-term loan backed by collateral – usually a U.S. government bond. The borrower gets cash by agreeing to sell the bond to another party and promising to pay it back at a slightly higher price. Often a bank will act as the middleman between money market funds lending cash and hedge funds that hold bonds.

What is the impact?

The changes are creating uncertainty about who will replace banks as middlemen. If the repo market isn’t running smoothly, other markets could see more hiccups, undermining the Fed’s goals of financial stability. For their part, regulators say the financial system is stronger overall with less short-term funding like repo.